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Slide 5-1. Slide 5-2 Chapter 5 Accounting for Merchandising Operations Financial Accounting, Seventh Edition.

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Presentation on theme: "Slide 5-1. Slide 5-2 Chapter 5 Accounting for Merchandising Operations Financial Accounting, Seventh Edition."— Presentation transcript:

1 Slide 5-1

2 Slide 5-2 Chapter 5 Accounting for Merchandising Operations Financial Accounting, Seventh Edition

3 Slide Identify the differences between service and merchandising companies Explain the recording of purchases under a perpetual inventory system Explain the recording of sales revenues under a perpetual inventory system Explain the steps in the accounting cycle for a merchandising company Distinguish between a multiple-step and a single-step income statement Explain the computation and importance of gross profit. Study Objectives

4 Slide 5-4 Forms of Financial Statements Accounting for Merchandising Operations Freight costs Purchase returns and allowances Purchase discounts Summary of purchasing transactions MerchandisingOperationsMerchandisingOperations Recording Purchases of Merchandise Recording Sales of Merchandise Completing the Accounting Cycle Operating cycles Flow of costs— perpetual and periodic inventory systems Sales returns and allowances Sales discounts Adjusting entries Closing entries Summary of merchandising entries Multiple-step income statement Single-step income statement Classified balance sheet

5 Slide 5-5 Merchandising Operations SO 1 Identify the differences between service and merchandising companies. Merchandising Companies Buy and Sell Goods WholesalerRetailerConsumer The primary source of revenues is referred to as sales revenue or sales.

6 Slide 5-6 Target is a Retailer

7 Slide 5-7 Merchandising Operations Income Measurement Illustration 5-1 Cost of goods sold is the total cost of merchandise sold during the period. Not used in a Service business. Net Income (Loss) Less Equals Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses SO 1 Identify the differences between service and merchandising companies.

8 Slide 5-8 The operating cycle of a merchandising company ordinarily is longer than that of a service company. Illustration 5-2 SO 1 Identify the differences between service and merchandising companies. Merchandising Operations Operating Cycle

9 Slide 5-9 In Chapter 2, we discussed the Historical Cost Principle Assets are recorded on the Balance Sheet at cost Cost includes all costs necessary to get the asset ready for its intended purpose $5,000

10 Slide 5-10 The Historical Cost Principle also applies to Inventory oInventory is a Current Asset oIt is recorded on the Balance Sheet at Historical Cost oCost includes all costs necessary to get the inventory ready for its intended purpose oLet’s look at the cost components for Inventory…..

11 Slide 5-11 Let’s assume a Perpetual Inventory System oA Perpetual Inventory system records all changes in the value of Inventory directly in the Inventory Account.

12 Slide 5-12 Perpetual System 1. Purchases increase Merchandise Inventory. 2. Freight costs, Purchase Returns and Allowances and Purchase Discounts are included in Merchandise Inventory. 3. Cost of Goods Sold is increased and Merchandise Inventory is decreased for each sale. 4. Physical count done to verify Merchandise Inventory balance. The perpetual inventory system provides a continuous record of Merchandise Inventory and Cost of Goods Sold. Merchandising Operations Flow of Costs

13 Slide Purchases of merchandise increase Purchases. 2. Ending Inventory determined by physical count. 3. Calculation of Cost of Goods Sold: Beginning inventory$ 100,000 Add: Purchases, net800,000 Goods available for sale900,000 Less: Ending inventory125,000 Cost of goods sold$ 775,000 Merchandising Operations Flow of Costs Periodic System This is similar to the ATM example….

14 Slide 5-14 Made using cash or credit (on account). Normally recorded when goods are received. Purchase invoice should support each credit purchase. Recording Purchases of Merchandise SO 2 Explain the recording of purchases under a perpetual inventory system. Illustration 5-5

15 Slide 5-15 Under the perpetual inventory system, companies record in the Merchandise Inventory account the purchase of goods they intend to sell. Illustration: Illustration: From INVOICE NO. 731 (Illustration 5-5) record the journal entry Sauk Stereo would make to record its purchase from PW Audio Supply. Merchandise inventory3,800May 4 Accounts payable 3,800 Recording Purchases of Merchandise SO 2 Explain the recording of purchases under a perpetual inventory system.

16 Slide 5-16 Illustration 5-6 Seller places goods Free On Board the carrier, and buyer pays freight costs. Seller places goods Free On Board to the buyer’s place of business, and seller pays freight costs. Recording Purchases of Merchandise – Terms of Sale Freight Costs – Terms of Sale Freight costs incurred by the seller are an operating expense. SO 2

17 Slide 5-17 Illustration: Assume upon delivery of the goods on May 6, Sauk Stereo pays Acme Freight Company $150 for freight charges, the entry on Sauk Stereo’s books is: Merchandise inventory150May 6 Cash 150 Recording Purchases of Merchandise SO 2 Explain the recording of purchases under a perpetual inventory system. Assume the freight terms on the invoice in Illustration 5-5 had required PW Audio Supply to pay the freight charges, the entry by PW Audio Supply would have been: Freight-out (or Delivery Expense)150May 6 Cash 150

18 Slide 5-18 Purchaser may be dissatisfied because goods are damaged or defective, of inferior quality, or do not meet specifications. Purchase Returns and Allowances Recording Purchases of Merchandise Return goods for credit if the sale was made on credit, or for a cash refund if the purchase was for cash. May choose to keep the merchandise if the seller will grant an allowance (deduction) from the purchase price. Purchase Return Purchase Allowance SO 2 Explain the recording of purchases under a perpetual inventory system.

19 Slide 5-19 Recording Purchases of Merchandise SO 2 Explain the recording of purchases under a perpetual inventory system. Illustration: Assume that on May 8 Sauk Stereo returned to PW Audio Supply goods costing $300. Accounts payable300May 8 Merchandise inventory 300

20 Slide 5-20 Credit terms may permit buyer to claim a cash discount for prompt payment. Advantages: Purchaser saves money. Seller shortens the operating cycle. Purchase Discounts Recording Purchases of Merchandise Example: Credit terms of 2/10, n/30, is read “two-ten, net thirty.” 2% cash discount if payment is made within 10 days. SO 2 Explain the recording of purchases under a perpetual inventory system.

21 Slide 5-21 Terms Purchase Discount Terms Recording Purchases of Merchandise 2% discount if paid within 10 days, otherwise net amount due within 30 days. 1% discount if paid within first 10 days of next month. 2/10, n/301/10 EOM Net amount due within the first 10 days of the next month. n/10 EOM SO 2 Explain the recording of purchases under a perpetual inventory system.

22 Slide 5-22 Merchandise Inventory 70 Accounts payable3,500May 14 Recording Purchases of Merchandise (Discount = $3,500 x 2% = $70) SO 2 Explain the recording of purchases under a perpetual inventory system. Illustration: Assume Sauk Stereo pays the balance due of $3,500 (gross invoice price of $3,800 less purchase returns and allowances of $300) on May 14, the last day of the discount period. Prepare the journal entry Sauk makes to record its May 14 payment. Cash 3,430

23 Slide 5-23 Accounts payable3,500June 3 Recording Purchases of Merchandise Cash 3,500 SO 2 Explain the recording of purchases under a perpetual inventory system. Illustration: If Sauk Stereo failed to take the discount, and instead made full payment of $3,500 on June 3, the journal entry would be:

24 Slide 5-24 Should discounts be taken when offered? Purchase Discounts Recording Purchases of Merchandise Example: 2% for 20 days = Annual rate of 36.5% (365/20 = twenty-day periods x 2% = 36.5%) Passing up the discount offered equates to paying an interest rate of 2% on the use of $3,500 for 20 days. SO 2 Explain the recording of purchases under a perpetual inventory system.

25 Slide 5-25 $3,8008 th - Return$300 Balance 4 th - Purchase $3, th - Discount Recording Purchases of Merchandise Summary of Purchasing Transactions 1506 th – Freight-in Illustration SO 2 Explain the recording of purchases under a perpetual inventory system.

26 Slide 5-26 Made for cash or credit (on account). Normally recorded when earned, usually when goods transfer from seller to buyer. Sales invoice should support each credit sale. Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system. Illustration 5-5

27 Slide 5-27 Two Journal Entries to Record a Sale Cash or Accounts receivableXXX Sales XXX Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system. #1 Cost of goods soldXXX Merchandise inventory XXX #2 Selling Price Cost

28 Slide 5-28 Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system. Accounts receivable3,800May 4 Sales 3,800 Illustration: Assume PW Audio Supply records its May 4 sale of $3,800 to Sauk Stereo (Illustration 5-5) as follows. Assume the merchandise cost PW Audio Supply $2,400. Cost of goods sold2,4004 Merchandise inventory 2,400

29 Slide 5-29 “Flipside” of purchase returns and allowances. Contra-revenue account (debit). Sales not reduced (debited) because:  would obscure importance of sales returns and allowances as a percentage of sales.  could distort comparisons between total sales in different accounting periods. Sales Returns and Allowances Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system.

30 Slide 5-30 Illustration: Prepare the entry PW Audio Supply would make to record the credit for returned goods that had a $300 selling price (assume a $140 cost). Assume the goods were not defective. Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system. Sales returns and allowances 300May 8 Accounts receivable300 Merchandise inventory 1408 Cost of goods sold140

31 Slide 5-31 Illustration: Assume the returned goods were defective and had a scrap value of $50, PW Audio would make the following entries: Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system. Sales returns and allowances 300May 8 Accounts receivable300 Merchandise inventory 508 Cost of goods sold50

32 Slide 5-32 The cost of goods sold is determined and recorded each time a sale occurs in: a.periodic inventory system only. b.a perpetual inventory system only. c.both a periodic and perpetual inventory system. d.neither a periodic nor perpetual inventory system. Review Question Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system.

33 Slide 5-33 Offered to customers to promote prompt payment. “Flipside” of purchase discount. Contra-revenue account (debit). Sales Discount Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system.

34 Slide 5-34 Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system. Cash3,430May 14 Accounts receivable3,500 Sales discounts70 * [($3,800 – $300) X 2%] * Illustration: Assume Sauk Stereo pays the balance due of $3,500 (gross invoice price of $3,800 less purchase returns and allowances of $300) on May 14, the last day of the discount period. Prepare the journal entry PW Audio Supply makes to record the receipt on May 14.

35 Slide 5-35 Generally the same as a service company. One additional adjustment to make the records agree with the actual inventory on hand. Involves adjusting Merchandise Inventory and Cost of Goods Sold. Adjusting Entries Completing the Accounting Cycle SO 4 Explain the steps in the accounting cycle for a merchandising company.

36 Slide 5-36 Completing the Accounting Cycle SO 4 Explain the steps in the accounting cycle for a merchandising company. Illustration: Suppose that PW Audio Supply has an unadjusted balance of $40,500 in Merchandise Inventory. Through a physical count, PW Audio determines that its actual merchandise inventory at year-end is $40,000. The company would make an adjusting entry as follows. Cost of goods sold 500 Merchandise inventory500

37 Slide 5-37 Completing the Accounting Cycle Closing Entries Dividends

38 Slide 5-38 Shows several steps in determining net income. Two steps relate to principal operating activities. Distinguishes between operating and non- operating activities. Multiple-Step Income Statement Forms of Financial Statements SO 5 Distinguish between a multiple-step and a single-step income statement.

39 Slide 5-39 Illustration 5-8 Income Statement Presentation of Sales Multiple-Step Income Statement SO 5 Distinguish between a multiple-step and a single-step income statement.

40 Slide 5-40 SO 6 Explain the computation and importance of gross profit. SO 6 Explain the computation and importance of gross profit. Illustration 5-13 Key Items: Net sales Gross profit Gross profit rate Illustration 5-10 Gross Profit Multiple-Step Income Statement

41 Slide 5-41 Forms of Financial Statements Key Items: Net sales Gross profit Operating expenses SO 5 Distinguish between a multiple-step and a single-step income statement. Illustration 5-13 Multiple- Step

42 Slide 5-42 Forms of Financial Statements Key Items: Net sales Gross profit Operating expenses Nonoperating activities Net income SO 5 Distinguish between a multiple-step and a single-step income statement. Illustration 5-13

43 Slide 5-43 Subtract total expenses from total revenues Two reasons for using the single-step format: 1) Company does not realize any type of profit until total revenues exceed total expenses. 2) Format is simpler and easier to read. Single-Step Income Statement Forms of Financial Statements SO 5 Distinguish between a multiple-step and a single-step income statement.

44 Slide 5-44 Illustration 5-14 Single- Step Forms of Financial Statements SO 5 Distinguish between a multiple-step and a single-step income statement.

45 Slide 5-45 Forms of Financial Statements Illustration 5-15 Classified Balance Sheet SO 5 Distinguish between a multiple-step and a single-step income statement.

46 Slide 5-46 Periodic System Separate accounts used to record purchases, freight costs, returns, and discounts. Company does not maintain a running account of changes in inventory. Ending inventory just counted “periodically” to see what is on hand and then COGS booked. 1 journal entry for sale -- COGS not recorded at Point of Sale (POS) SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system. Periodic Inventory System

47 Slide 5-47 Calculation of Cost of Goods Sold $316,000 Illustration 5A-1 SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system. Periodic Inventory System

48 Slide 5-48 SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system. Illustration: Illustration: On the basis of the sales invoice (Illustration 5-5) and receipt of the merchandise ordered from PW Audio Supply, Sauk Stereo records the $3,800 purchase as follows. Purchases3,800May 4 Accounts payable 3,800 Recording Purchases under Periodic System

49 Slide 5-49 SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system. Illustration: Illustration: If Sauk pays Acme Freight Company $150 for freight charges on its purchase from PW Audio Supply on May 6, the entry on Sauk’s books is: Freight-in (Transportation-in)150May 6 Cash 150 Freight Costs Recording Purchases under Periodic System

50 Slide 5-50 SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system. Illustration: Illustration: Sauk Stereo returns $300 of goods to PW Audio Supply and prepares the following entry to recognize the return. Accounts payable300May 8 Purchase returns and allowances 300 Purchase Returns and Allowances Recording Purchases under Periodic System

51 Slide 5-51 SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system. Illustration: Illustration: On May 14 Sauk Stereo pays the balance due on account to PW Audio Supply, taking the 2% cash discount allowed by PW Audio for payment within 10 days. Sauk Stereo records the payment and discount as follows. Accounts payable3,500May 14 Purchase discounts 70 Purchase Discounts Cash 3,430 Recording Purchases under Periodic System

52 Slide 5-52 Sales Revenues - Under a Periodic System ONLY 1 entry is made for each sale ONLY 1 entry is made for each sale one to record sale one to record sale

53 Slide 5-53 No entry is recorded for cost of goods sold at the time of the sale under a periodic system. SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system. Illustration: Illustration: PW Audio Supply, records the sale of $3,800 of merchandise to Sauk Stereo on May 4 (sales invoice No. 731, Illustration 5-5) as follows. Accounts receivable3,800May 4 Sales 3,800 Recording Sales under Periodic System

54 Slide 5-54 SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system. Illustration: Illustration: To record the returned goods received from Sauk Stereo on May 8, PW Audio Supply records the $300 sales return as follows. Sales returns and allowances300May 4 Accounts receivable 300 Sales Returns and Allowances Recording Sales under Periodic System

55 Slide 5-55 SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system. Illustration: Illustration: On May 14, PW Audio Supply receives payment of $3,430 on account from Sauk Stereo. PW Audio honors the 2% cash discount and records the payment of Sauk’s account receivable in full as follows. Sales Discounts Cash3,430May 14 Accounts receivable3,500 Sales discounts70 Recording Sales under Periodic System

56 Slide 5-56 Key difference between periodic and perpetual inventory… is the point at which the costs of goods sold is computed.

57 Slide 5-57 SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system. Illustration 5A-2 Comparison of Entries-Perpetual vs. Periodic

58 Slide 5-58 SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system. Illustration 5A-2 Comparison of Entries-Perpetual vs. Periodic

59 Slide 5-59 Companies that use Periodic inventory take a physical count to... determine ending inventory compute cost of goods sold

60 Slide 5-60 Companies that use Perpetual inventory take a physical count to... Check accuracy of “book inventory” to actual inventory.

61 Slide 5-61 Good Bye and Good Luck! End of Chapter 5 SO 5 Distinguish between a multiple-step and a single-step income statement.

62 Slide 5-62 Illustration 5B-1 SO 8 Worksheet for a Merchandising Company

63 Slide 5-63 “Copyright © 2010 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.” CopyrightCopyright

64 Slide 5-64

65 Slide 5-65

66 Slide 5-66 In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting: a.Purchases b.Purchase Returns c.Purchase Allowance d.Merchandise Inventory Question Recording Purchases of Merchandise SO 2 Explain the recording of purchases under a perpetual inventory system.

67 Slide 5-67 The multiple-step income statement for a merchandiser shows each of the following features except: a.gross profit. b.cost of goods sold. c.a sales revenue section. d.investing activities section. Review Question Forms of Financial Statements SO 5 Distinguish between a multiple-step and a single-step income statement.


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